Death Tax Resurrection

The Wall Street Journal editors have written a short piece on the death tax. In the swirl of the election, no one is talking about the estate tax (well, we have been), and they should. They start with this:

For all the worry in Washington and Wall Street about the January tax cliff, almost no one is paying attention to the impending reincarnation of the death tax. This is one more tax increase that will live or die depending on who wins on November 6.

Thanks to the Bush-era tax cuts, this much-loathed levy fell to zero in 2010, but President Obama insisted on bringing it back and Republicans compromised with him after the 2010 election on a 35% rate and a $5 million exemption for 2011 and 2012. In 2013 the rate is scheduled to rise all the way back to 55% with a meager $1 million exemption—where it was in 2001. Americans who have worked a lifetime to accumulate $1 million of savings or other assets will be surprised to learn that Washington thinks they are plutocrats.

They then explain how the estate tax impedes economic growth:

Abolishing the estate tax would also mean higher income-tax revenues. Under current law, billionaires like Warren Buffett and Bill Gates escape the tax by diverting their wealth into charitable foundations. But when income-generating assets are sheltered in this way, these foundations with a few exceptions don’t pay tax on the future income from dividends, capital gains or interest. Eliminate the death tax and fewer people will shelter their money in foundations, meaning the money will continue to earn taxable income.

Most important, because the estate tax is a penalty on saving and capital investment, the economy grows more slowly over time. This is why so many industrialized nations, including Canada and Russia, have thrown out this tax as more trouble than it is worth.

Consider the perverse incentives of the tax. When a business owner begins to consider retirement with perhaps $10 million of lifetime wealth, he can reinvest the profits in the business (which means growth and more workers) or live lavishly in retirement and spend the money down to zero.

In the first case, he is smacked with federal and state death taxes that can take away half of the wealth. In the second instance, he pays no tax. A new study by the Joint Economic Committee Republican staff estimates that because of this disincentive to save and invest “the estate tax has cumulatively reduced the amount of capital stock in the U.S. economy by roughly $1.1 trillion.”

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